REO-to-Rental ABS Dogged by Claims of House Price Impact

Since Blackstone unit Invitation Homes issued the first securitization of single-family rental properties last November, the sector has drawn criticism from housing analysts and politicians.

A big focus of the detractors is the potential for securitization to boost the participation of institutional investors in homeownership in communities, which in their view might have a destabilizing effect on home prices in the future. Critics have also cited concerns that larger investors will not keep up homes with the same diligence that mom-and-mom investors do.

Just last month, Rep. Mark Takano (D-CA) sent a letter asking four federal entities to conduct a detailed investigation into the growth of REO operations and REO-to-rental as an investment and to explain how they plan to regulate the asset class.

And in late February, the Center for American Progress, a public policy research and advocacy group, issued a report stating that securitization “is certain to have an impact on the housing market, communities and tenants.”

“While institutional investors only represent a fraction of those in the housing market — midsized companies and small mom-and-pop investors who own less than 10 properties are currently far more prevalent in most markets — securitization may being to shift this balance,” stated the report, penned by Policy Analyst Sarah Edelman, Director of Housing Finance and Policy Julia Gordon and Research Assistant David Sanchez.

Fitch Ratings is also concerned that sales of individual homes might potentially be “the only exit strategy” of transactions if liquidations are needed to pay off a bond at maturity.

“The impact on a large scale listing at a neighborhood level could have a significant impact on market clearing prices,” the agency stated in a report published last October.

The report states that Fitch would not be willing to assign its highest rating, AAA’ to an REO-to-rental securitization.

Of course the impact of sales of rental properties backing securitizations depends on how concentrated these properties are in individual communities.

In a March 14 blog post, Ken Fears, manager of regional economics and housing finance policy at the National Association of Realtors, discussed two possible scenarios in Phoenix. In the first scenario, all the area homes backing Invitation Homes’ securitization are dumped on the market at the same time; in the second, more drastic scenario, all of the homes in Phoenix owned by any kind of institutional investor are simultaneously put up for sale.

Invitation Homes’ transaction is backed by 1,090 homes in Phoenix — about 34% of the deal’s property — while institutional investors own a total of 13,700 homes in the city.

Fears concluded that if Invitation Homes’ properties were to flood the market at once, the supply would rise in February to 5.5 from 5.7 months, meaning it would take that much time for the homes on sale to clear the market.

This probably wouldn’t affect prices, he said.

A supply between six and 7.5 months is a neutral market, according to Fears. Lower supply jacks up prices, while higher supply sends them lower.

In the other scenario — if all the 13,700 institutional investor-owned properties in Phoenix were simultaneously for sale — the supply would jump to 8.6 months, generating downward pricing pressure.

Still, this would not even come close to the trough of the Phoenix’s housing correction in February 2008, when the supply was 16.5 months.

Of course, these are extreme scenarios.

In the vast majority of communities across the country, institutional investor-owned homes represent a tiny fraction of the total rental market. The national figure is 5%, although it is higher in certain areas, such as Phoenix.

The question is whether securitization will grow quickly enough to cause potential problems.

With prices rising in many markets, there is less of an incentive for players to enter this market but observers still expect it to grow significantly.

In a recent paper on REO-to-rental securitization, Laurie Goodman, the director of the Urban Institute’s Housing Finance Policy Center, noted that higher prices means that institutional investors will need to add “moderate leverage to deliver attractive returns to their equity investors. Look for many more institutional investors in single-family properties to add leverage in 2014.”

This, naturally, could make investors themselves more vulnerable to pricing corrections down the road.

At least for now, “the volume of securitized properties would not destabilize even the most concentrated local market,” Fears said. But he added that, as the industry grows, “that balance could change.”

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